This steep market swell may be dangerous to ride out

By Barbara Kollmeyer

Published: Aug 27, 2015 10:03 am ET

Critical information ahead of the market’s open

Watch the rips

Triggering the biggest one-day point gain in seven years for Wall Street yesterday, Dudley did something right. The NY Fed President’s “less-compelling”-for-now comment on the potential of a September interest-rate hike has crushed the bear rebellion and perhaps that Bearmageddon. At least for now.

Money-market futures are pushing that first rate hike all the way out to 2016, says Ian Williams, economist at Peel Hunt. That, of course, could back the Fed into a corner pretty good, as a few out there are getting more and more comfortable batting the term “QE4” around. Even KC Fed President Esther George said this morning that turmoil lately is throwing a monkey wrench into any decision.

Clearly, every word is going to be scrutinized to the nth degree at the Fed’s Jackson Hole gathering, which kicks off with a dinner tonight. Investors may have to wait until Saturday, when Fed Vice Chairman Stanley Fischer speaks, for the real excitement.

Positioning for the Fed to be more dovish than you think has worked pretty well in the last decade or so, notes Kit Juckes, macro strategist at Société Générale. “This positioning, however, is part of the source of danger to market stability, since it means that any ‘less dovish’ comment or action is magnified, because it comes as a surprise,” he cautions in a note.

And the market psyche has already been damaged by this thrill ride we’ve been on, which on Wednesday saw 98% of stocks rip higher, notes Sean D. Emory, blogging for The Market Meter. “It gets to a point where nobody wants to buy the rip, because you want the market to settle; then as it moves even higher you buy, only to be left with nothing as it moves lower,” he says.

Emory offers some advice on how investors should keep their cool these days, and that’s by going back to basics. “Before you make a decision, step back and ask yourself again: ‘Why am I buying this stock?’” Check out our chart of the day for more.

Even as we peer down the barrel of potentially another big up day for markets, skeptics are out there, lurking en masse. Our call of the day advises investors to do anything but play it cool right now. In fact, run, don’t walk to the nearest exit for this rally, because the fun is just getting started.

The quote

“I’m going to do something, whatever it takes, to get gun legislation — to shame people, to shame legislators into doing something about closing loopholes and background checks and making sure crazy people don’t get guns.” — Andy Parker, the father of TV reporter Alison Parker, speaking after his daughter was killed along with cameraman Adam Ward when a former colleague ambushed them during a live interview.

Meanwhile, social media is calling New York Daily News’s Thursday cover tasteless.

The call

“Forget buying the dips. Sell the rips...” That’s the advice from The Daily Reckoning’s blogger Greg Guenthner, who warns investors against immediately trusting this rally or the big ones that are probably coming in the next few weeks.

“Why not? Because the biggest rallies in history have come during bear markets. It’s that simple,” he writes. He notes these factoids from a USA Today article written during the 2008 meltdown: Four of the top five all-time point gains for the Dow and ten of the biggest point rises for the Nasdaq Composite occurred 2000-2002 bear market.

And as MarketWatch’s Anora Mahmudova reports, analysts are far from believing the market pain is over. “It is time to tighten seat belts, as it’s going to stay volatile for some time, because we do not have definitive answers to the China, Fed and earnings questions,” Kim Forrest of Fort Pitt Capital Group tells her. Read that article here.

Guenthner highlights this chart showing the aftermath of the Flash Crash of May 2009:

The economy

Weekly jobless claims showed a 6,000 fall to 271,000, while a fresh read on second-quarter GDP shows growth revised up to 3.7% from a prior 2.3%, which beat economists expectations. Pending home sales are still due at 10 a.m. Eastern. Jackson Hole kicks off with a dinner tonight.

The chart

Joshua Brockwell, director of investment communications at Azzad Asset Management, says investors who may have tried to time this market will probably only end up hurting themselves.

There’s no telling how many investors bailed recently, but the millions driven out by the stock market crash of 1987 are a testament to what can go wrong, he notes. “The S&P 500, a proxy for the market as a whole, posted an annual return of more than 30% two years later, one of only 12 calendar years since 1926 when the market performed that well,” writes Brockwell.

“Successful long-term investors understand that the stock market rises and falls, and that the only way to profit when the market rebounds is to stay invested when it drops,” he said. Here’s his chart, which shows the high price of rushing out at the first sign of trouble.

Need to Know starts early and is updated until the opening bell, butsign up hereto get it delivered once to your email box. Be sure to check the Need to Know item. The emailed version will be sent out at about 7:30 a.m. Eastern.